Personal Finance Stress Test
Thanks to The Blunt Bean Counter for pushing me a little bit to get this blogpost done, since he hit on something I’ve been thinking about for some time now, stress testing your personal finances.
What does stress testing imply?
In general terms, stress testing is about demonstrating the stability of a given process or system when that process or system is pushed beyond its normal operating means. Ok, that was overly technical. How about something more simplified…
I think stress testing means the conditions that push you into crash mode and how you cope or recover from that.
Ideally, passing the stress test should demonstrate some level of stability under exaggerated conditions.
In the world of personal finance and investing, I suspect we all have our “what if’s” in life; how we would recover from a crash that impacts us financially. For today’s post, please consider answering what you’d do in any of these situations to keep your life somewhat stable in very unstable circumstances.
I’ll give you my answers in italics below.
Are you spending more than you earn today?
No. Any “leftover” money today after paying ourselves first, paying the base amount on mortgage and for living expenses goes towards our fat mortgage in the form of lump-sum payments every 2 weeks and into our investments every month.
If your income dropped by 50% for 6 months what would you do?
We would immediately stop our lump-sum mortgage payments. We would pay the base required on our mortgage. We would immediately stop all discretionary spending; no more dining out, trips/vacations or purchases for the home. We would immediately suspend all investment contributions. We would curb grocery spending to the essentials and revisit our current expenditures on electricity, gas and cable.
If you needed more income what would you do?
I would try and find another job as soon as I could. I would also stop any reinvestment activities for any securities I own and use the income paid as dividends and distributions for living expenses instead.
Do you have enough insurance to pay off debts in the case of a death?
Yes.
Do you have a Will? Do both spouses know where to find it? Is it up to date?
Yes and Yes and Yes.
Do you have a list of assets (investments, real estate, other) you own? Do both spouses know where to find it? Is it up to date?
Yes and Yes and No. I’ve got work to do on keeping things more current.
Do you know you have access to money if you needed it in an emergency (line of credit, savings account)? Do you know what accounts you’d withdrawn from first to avoid more debt? Is the money readily accessible within one day?
Yes and Yes and Yes.
Do you know you have a list of emergency contact information for professionals in an emergency situation (doctor, lawyer, and accountant)?
Yes.
I’m sure there are many more questions to stress test your personal finances but I suspect these questions are a decent start in the right direction. Some financial preparedness can go a long ways in the event an accident or a catastrophe. Let’s hope we never need to worry about putting more stress to the test for a very long time.
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I think many people would be scared stiff to even try this test, as many of us would fail it. The reality of the individual financial stress is only starting to dawn on mnay people following the age of ridiculously easy credit having now gone.
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I am divorced, my kids are gone, and I work two jobs so if I had a 50% drop in net income, I’d only save 3% and maybe drop basic cable and cut back on eating out to get my savings back up.
No too bad Devin. I know a 50% income drop would be tough for us…with our fat mortgage. Hopefully we can kill it in 9 years.
Sounds like you’ve got a good plan!
One thing you may want to add in the future, sadly, is a plan for what if a parent or other family elder suddenly needs your direct support. Travel costs, losing work hours to provide caregiving or paying for a PSW can knock a hole in your budget if your relative can’t pay for anything themselves. If it seems the time could come sooner rather than later, it’s worth exploring options (including community services, long term care and day only care facilities, etc.) BEFORE an emergency.
Although I don’t think this is the *first* sandwich generation, it certainly is one of many generations that has had to care for elders at the same time as raising children.
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I think these questions vary on different scenarios. The answers will be significantly different with singletons vs. families for example. Almost 3 yrs ago I would have been flipping out in stress. Today I’m much more calm, got savings in order, emergency plans as backups and am virtually debt free (mortgage not included)
Great questions though!!
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Fair points Eddie…the answers definitely depend on where you’re at in life. I figured they were good starters though.
I stress out about debt. I have a post about that coming up. I really wish I had no mortgage. I’m working on it
The questions are quite provocative, but not necessarily reflect reality.
I found them SHORT term emergency focus /orientated – what if. What they do not address are actual plans for the future and how t get there.
It does alter fact that these are very important subjects.
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Fair comments, short-term focus. Long-term, there are probably other questions to ask but that’s not a stress test. That a long-term plan.
Thanks for your contribution to the blog.
I think you could have a line of questions surrounding what would happen if your assets (real estate and investments) dropped in half due to a market crash. Would you be under water on your mortgage and/or HELOC? Would the loss of 50% of your investments affect you in the near term (retirement)?
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Thanks for your comment. Yeah, I could definitely have a whole set of questions about the RE and investments tanking. Actually, regarding the investments, I wouldn’t mind if they dropped by 20% right now. I’d just buy more stocks.
If my investments dropped 50% tomorrow, it wouldn’t impact my financial plan one bit.
We are ok with all of those although we don’t have a will but that’s next on our to-do list although something we should have looked at sooner. Great post
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Sounds like you’re in great shape Mr. CBB. Kudos to you.
I have will and medical directive so I pass one of the tests.
I would have to go deeper in to debt for a small emergency and I would be sunk if something big happens. I have only myself to rely on and that is darn scary many days.
Well done Jane Savers! Relying only on you can be a benefit though…may help you stay more focused.
You said: Do you have enough insurance to pay off debts in the case of a death?
You should insure loss, not debt. And at death, the financial loss is our income/paycheque – not our debt. So the correct question should be:
Do you have enough insurance to replace your income in the case of a death?
And the followup question:
Do you have enough insurance to replace your income in the case of a disability?
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That’s true Glenn, insurance is for a loss, so that would have been a better question.
Good comment.
Good questions! This isn’t exactly where you went with this post but here’s my personal finance stress test question: Can you sleep well at night? My nights were much more restful once I got on the right track with some of these things you listed.
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Thanks Brian!
Actually, I’m starting to sleep better at night…now the mortgage is getting paid off. It is my biggest financial stressor. I don’t worry too much about my investments but the mortgage debt worries me now and then. Only 9 more years to go with lump sum payments, then it’s dead.
Really important questions. I’m going to bookmark this post then talk to the bf about each question. I think we’re doing OK, but there were some questions we need to work on.
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Thanks for checking them out! I need some work on them as well.
We recently started taking care of the will with a notary, but have a few loose ends that still need to be tied up there. Something I also need to get in place is an accountant, the corporate T2 looks quite nightmarish. :O Good point on how important it is to have access to professionals on hand, as you don’t want to screw these things up.
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Yeah, professionals on hand is a big one I think. I’m fairly comfortable with my taxes, but this year will be added complexity since this small blog business of mine is picking up…which is nice
Thanks for making time to comment Kevin, I know you’re busy building more apps!
We’d be fine, but would also immediately reduce our mortgage payment and slowly ratchet down some more of our discretionary spending. We’ve got a ton of flexibility in the mortgage because we’ve so massively overpaid it. I bet we could get down to $350 a month or so without having to refinance.
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Tons of flexibility in the mortgage is important Anne, well done. I think we have a bit of flexibility but not as much as we would like. All I know is, the more dividend income I can get and the less our mortgage is, the better off we will be.
What a great checklist – I am afraid I had to answer no to some of these but I want to have this all done the next 2 months (finally back in Canada).
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Thanks Steve.
I hope you’ve had some great travels! We just got back from a vacation ourselves
I do pretty well on most of those. I can take a 50% pay cut. I can pull some extra income from dividends. I’m building a one year emergency fund. And I have no debt to worry about.
I don’t do well on things like having a will or life insurance. I’m young and single so I’ve been putting those off.
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Nice work. Taking a 50% pay cut is huge IMO. If we didn’t have the dividend income, I’m not sure we could pull it off with the mortgage we have. Another reason to kill the debt sooner than later.
A one year emergency fund? That’s a bundle.